Court orders record recovery against FTX

The disgorgement funds “will be used to further compensate victims for losses suffered as a result of the massive fraudulent scheme orchestrated by Samuel Bankman-Fried, his now-bankrupt FTX group of companies, and a core group of FTX insiders,” the CFTC said.

Additionally, the order, which finds that FTX violated derivatives laws and regulations, imposes injunctions and trading and registration prohibitions against the respondents in the case, and it also requires FTX and Alameda to cooperate with the CFTC in its ongoing litigation.

“The court noted that FTX touted itself as ‘the safest and easiest way to buy and sell crypto,’ and that customer assets, including digital assets such as bitcoin and ether, were held in ‘custody’ by FTX while stating FTX segregated customer assets from FTX’s own assets as a general principle, when in fact customer funds were commingled and misappropriated,” the CFTC said.

According to CFTC enforcement director, Ian McGinley, the order represents the largest-ever investor recovery achieved by the CFTC.

“FTX’s massive fraud collapsed 21 months ago and in that time the CFTC investigated, filed a complaint, and achieved what many thought was impossible at the time of the collapse — a resolution to compensate victims for the losses they suffered,” he said in a release.

In a related settlement agreement, which was approved by the U.S. bankruptcy court in Delaware, the CFTC agreed not to seek a civil monetary penalty against FTX and to subordinate its claims against the firms to claims by the victims of the FTX fraud scheme.

The issuance of the consent order resolves the CFTC’s litigation against FTX, it said, leaving cases pending against four individual defendants, including Bankman-Fried.

In that ongoing litigation, the CFTC is seeking restitution, disgorgement, monetary penalties, and permanent trading and registration bans, the regulator said.

“FTX used age-old tactics to create an illusion that it was a safe and secure place to access crypto markets. But the basic regulatory tools, like governance, customer protections, and surveillance that exist to identify misconduct and ultimately prevent collapse, were simply not there,” said CFTC chairman, Rostin Behnam, in a release.

Behnam also stressed that regulatory enforcement action in the crypto sector “is just the tip of the iceberg.”

“In the absence of digital asset legislation to fill regulatory gaps, entities will continue to operate in the shadows without these basic tools of sound regulation, sharpening their deceptive practices and continuing to dupe customers,” he said.

Behnam’s call for enhanced regulation of the crypto sector was echoed by CFTC commissioner, Kristin Johnson.

“Customers and the public were not alerted to FTX’s ongoing misconduct due to the absence of crucial regulation over digital assets needed to establish appropriate risk management mechanisms to address conflicts of interest and other related issues, a lack of transparency and inadequate oversight,” she said in a statement.

“Going forward, we must prioritize efforts to protect customers in markets with regulatory gaps, where customers may be at higher risk due to the absence of adequate safeguards,” she said.